MARKET MATTERS AUGUST 2009
REIT Preferred Securities Potential Default Risk
What is the potential risk of default to REIT preferred shareholders?
In our view, the cash dividends generated by REIT preferred shares offer a degree of insulation
as compared to the common equity issued by the same company, due to their priority claim on
cash distributions—common dividends would ﬁrst have to be eliminated before the preferred
dividend could be omitted.
In the case of the REITs listed below, each company paid out common dividends of between
$36 million and $522 million in 2008. Although some common dividends have been reduced or
suspended for 2009, we see the substantial levels of common dividends as meaningful insula-
tion against the future prospect of potential preferred dividend omissions.
Forward Select Income Fund Top 10 Issuers as of 6/30/09
Preferred and Common Dividends Paid for Calendar Year 2008 1 (in millions)
15.8 14.5 25.4 47.8 35.6 11.6 71.4 9.7 15.8 50.8
Preferred Preferred Preferred Preferred Preferred Preferred Preferred Preferred Preferred Preferred
LTC Equity ProLogis Kimco Weingarten BioMed Digital Omega AMB PS
Properties, Residential Trust Realty Realty Realty Realty Healthcare Property Business
Inc. Corp. Investors Trust, Inc. Trust, Inc. Investors, Corp. Parks, Inc.
Source: Foward Management, LLC.
A recent sensitivity analysis of 86 REIT preferred issuers found that 80% of those reviewed
could withstand a 50% decline in operating cash ﬂow (deﬁned as Earnings Before Interest,
Taxes, Depreciation and Amortization, or EBITDA) before their coverage ratios would suggest
imminent cuts to preferred dividends.2
Forward Thinking. Forward Funds. MARKET MATTERS AUGUST 2009
While this grim scenario cannot be fully discounted, we continue to feel positive about the
prospects for the vast majority of our underlying companies’ ability to pay their dividends. We
believe that the previously limited long term default rate for REIT preferred stocks will likely
rise in response to the recessionary environment and the ﬁnancial crisis. However, due to the
securities’ priority claim on cash dividends, and the cumulative nature of real estate preferred
shares—meaning that the issuer must accrue any missed dividend as a liability and eventually
pay it—at this time, we do not believe REIT preferred defaults will be a widespread problem.
Learn more today at www.forwardfunds.com or call (888) 312-4100.
Source: Dividend payout information
sourced from each company’s 2008
10-K ﬁling with the exception of Corporate
Ofﬁce Properties Trust, whose dividend
information was sourced from its Supple-
mental Information Package.
Source: Wachovia, November 2008.
Operating cash flow represented by
EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortization), which
is an indicator of a company’s ﬁnancial
You should consider the investment
objectives, risks, charges and expenses
carefully before investing. A prospectus
with this and other information about the
funds may be obtained by calling (888)
312-4100 or by downloading one from
www.forwardfunds.com. It should be
read carefully before investing.
The Fund will invest in lower-rated
debt securities and may utilize de-
rivatives for hedging purposes. The
Fund’s use of short selling involves
additional risks and transaction
costs, and creates leverage, which
can increase the volatility of the
Fund. The Fund may invest a larger
percentage of its assets in the se-
curities of a smaller number of is-
suers, since it is a “non-diversiﬁed”
Forward Funds are distributed by ALPS
Distributors, Inc. (9/09)